Posted
by
Unknown Lamer
on Monday April 02, 2012 @02:19PM
from the so-that's-why-i-keep-paying-more-for-less dept.

An anonymous reader writes with an excerpt from Broadband Convergent: "We all have been taught the basics of supply and demand since high school. If demand is high, prices rise. If demand is low, prices fall. Simple, but true; yet this concept can be manipulated artificially if, as seen with the latest projections of mobile operators, that higher demand means higher prices. Are the dire predictions being promoted by operator's a true demand, as we have been told, or capacity hoarding that will lead to artificially higher prices and more profits for the mobile industry?"
The gist seems to be: operators have no incentive to maintain good infrastructure because it costs money and the artificial scarcity of capacity allows them to charge more.

After all, AT&T's shoddy network encouraged huge numbers to switch to other carriers the moment Apple allowed them to. In business having a poor product might allow you to gain in the short term but is a huge detriment in the long term.

Which is where competition is supposed to come in. If there is that much profit sitting out there, then there is an incentive for other players to enter the game, or for existing players to differentiate with high quality. Unfortunately, it often doesn't happen quickly, and sometimes needs some governmental encouragement. This is especially true with services that have such a high barrier to entry, like mobile.

In theory, companies that produce shitty service and charge too much for it go out of business.

In reality, the government metes out frequencies in a bidding process that generally shuts out competition.

The alternative would be to close down the FCC and let people broadcast whatever they want wherever they want at whatever power pleases them. There are probably people who think this is a good idea, and won't believe otherwise until Anonymous gets a hold of a transmitter.

This works as long as there are competitors that are providing sufficiently better service. If there's a market containing, only, say, three companies, and barriers to entry are sufficiently high to block any new firms from forming, it's entirely possible that all three would, individually, seek to keep capacity as low as possible and just assume that the others will do the same. It's a prisoners' dilemma, sure, but those don't always preclude unspoken collusion when the number of participants is sufficiently small.

operators have no incentive to maintain good infrastructure because it costs money and the artificial scarcity of capacity allows them to charge more.

Which wouldn't be a problem except the government created the teleco monopoly by creating a resource scarcity, namely exclusive contracts, tower permits, etc. The cost of entry into the market is so high that there can be no new players except from related businesses who feel like blowing a few billion cutting the red tape will go over well with their shareholders.

"We all have been taught the basics of supply and demand since high school. If demand is high, prices rise. If demand is low, prices fall."

In that case, the author was poorly educated. The caveat "...in the perfect market" is missing; that is, where all players have perfect knowledge.

The so-called "law" of supply and demand can also be operated in reverse: keep prices artificially low and demand will rise; keep prices artificially high and demand will fall. Anyone who doesn't know this will not last long in business.

Well, thanks there, Capt. Obvious... hard to recognize you without the cape, lol.

In all seriousness, collusion is only illegal if A) someone notices, and B) the government decides to prosecute. For example, prior to the repeal of Glass-Steagall, it was illegal for a holdings bank to operate as an investment bank (and vice versa); yet that did not prevent Goldman Sachs from requesting (and receiving) a pass from the SEC to do just that.

Another example: the oil industry. In fact, I don't even really have to go into detail on that one; I think pretty much everyone who buys gasoline (which, consequently, is pretty much everyone) is fully aware of how the oil cartels collude to fix prices and get away with it.

In short, while you are 100% correct in principle, the reality of our economic situation is that those who can afford to circumvent the law, do.

The alternative would be to close down the FCC and let people broadcast whatever they want wherever they want at whatever power pleases them. There are probably people who think this is a good idea, and won't believe otherwise until Anonymous gets a hold of a transmitter.

Correction: it would be a good idea, if humanity wasn't primarily comprised of greedy, narcissistic assholes.

If the laws of thermodynamics didn't apply to everything, perpetual motion machines would also be a good idea. But it does, so they aren't.

Same with humans. We ARE primarily composed of greedy, narcissistic, psychopathic assholes, so letting anyone broadcast anything anywhere is really a bad idea.

What I don't understand about telco behavior is their simultaneous enthusiasm for dragging their feet as hard as possible on infrastructure buildouts/enhancements and service pricing and for pushing dubiously mature 4GLTE!!!zOMG 433453Gigabits! based handsets that get approximately 45 seconds of battery life, which would be just enough time to run through an 'unlimited' data plan were it not horribly throttled by congested backhaul...

Given the, um, impressive state of competition, sandbagging on service upgrades, sometimes even going backward on pricing, is pragmatic enough; but why are they accompanying that with a push toward devices that are vastly overqualified for the infrastructure, cost more, and deliver lousier user experience?

Does MaBell sound familiar? Standard oil? Microsoft? It's not unprecedented that people in the United States have been royally screwed by trusts, and the feds breaking them up improved the situation for everyone.

It turns out that a certain amount of regulation can help correct for that government granted monopoly on frequencies. We probably need more regulation in the mobile market since we aren't going to have a true free market there in the foreseeable future. For example, if we required phones to work on all of the available networks, required contract (subsidized) plans to clearly separate the subsidy from the price of service and sell plans to "bring your own phone" folks at that price of service so that people could jump to whatever carrier they wanted in the US - we would see competition start to actually work as it should.

It must be encouraged by giving the regulators teeth to fight stagnation and collusion.

Exactly.

Sitting on bandwidth licenses without using them is simply sequestering public airwaves for private use, by paying a license, but then failing to develop the resource entrusted to you. The FCC should perform a survey of idle licenses, and demand they be developed and marketed.

Hording or Failing to deploy should be (and probably is) a violation of the bandwidth license. (As precedent, Alaska canceled several North Slope Oil/Gas leases [adn.com] when the oil companies failed to develop the fields.) After all, a public resource was entrusted to these carriers to use for all of our benefit. Sitting on them while raising prices is not an acceptable outcome.

Another example: the oil industry. In fact, I don't even really have to go into detail on that one; I think pretty much everyone who buys gasoline (which, consequently, is pretty much everyone) is fully aware of how the oil cartels collude to fix prices and get away with it.

ARE they colluding, though? Or just responding to price rises/drops very quickly and economically efficiently?

I mean, take a common situation of two gas stations at opposite corners at an intersection. For simplicity, we'll call them A and B. Doing this we eliminate disparty in local taxation (assuming a road isn't the dividing line between two towns/cities/etc), and assume for the most part, everything is equal. We'll also make the assumption that consumers don't have brand loyalty.

Now say gas station A drops their price 10 cents. Gas station B can decide to drop their price, or leave it be, or raise it. Gas station B observes - if A's traffic increases, B's drops, the obvious reaction is to drop the price 10 cents to match A's.

However, it's also possible that A's traffic increases, B's remains constant, which means the disparity isn't hurting business. In the case, maybe B might decide to RAISE prices a little bit, say, 2 cents. Or if A only dropped 5 cents, to riase by 5 cents (increasing the difference to 10 cents between the two).

Now look at it from A's perspective - B drops the price, picks up extra customers. A needs to decide if the loss in profit from selling cheaper is outweighed by the extra traffic. Perhaps the required extra traffic hasn't materialized, so A is making a loss (sell for less profit, make it up in volume) - making A consider raising prices or holding steady.

However, if B decided to not join in the price war, and customers still go to B such that B can raise the price, A would be leaving money on the table since B's making more per unit of gas. A rational business will then raise prices - perhaps still under B , but not much so. Or match prices.

The neat thing with gas stations is - the change in traffic is practically instantaneous - you'll know within minutes of changing the gas price if it was a good idea.

And the reason traffic to B, even though its more expensive, might not drop is easy - if A has more customers they can service, then people may see B as a more expensive alternative, but avoid waiting in long gas queues. Or maybe the difference isn't large enough to justify potential inconvenience of having to turn around.

Competition doesn't necessarily lower prices - it can lead to prices stabilizing to some arbitrary level. Depending on how easy it is for customers to switch between compeitors, it determines how closely prices track one another. If it's really easy (like gas), prices rise and fall pretty much simultaneously (the geographical are of which is determined by customers' willingness to go farther in search of cheaper gas). This applies too to TV and internet, and cellphones to some extent. But take something like food staples where customers might wish to stick with brand names rather than the considerably cheaper store brands.

Remember, in a perfectly functioning market, the prices will be the same amongst competitors to equalize supply and demand. New competitors might come in and increase supply, lowering prices, but that depends on how much capital investment is required - cellphones and gas stations being particularly heavy (equipment is expensive/haz-mat concerns).

And yes, prices rise faster than they fall, because a business that sees someone making greater profit by selling product more expensive will tend to have others selling at the higher price. Case in point - netbooks. They started at $200, then rapidly jumped to $300, then "premium" netbooks starts showing up costing $400, $500 or more (barging into low-end laptop territory), until the whole market collapsed with the tablet craze.

Heck, tablets are the same - they were released at $500, and everyone questioned why get one when you can buy an iPad. So they dropped to $400 and hovered there ever since (with the iPad being Apple able to command a premium).

I think pretty much everyone who buys gasoline (which, consequently, is pretty much everyone) is fully aware of how the oil cartels collude to fix prices and get away with it.

Boy, are you naive. Republicans apparently believe that there is a free market in oil, and that the free market is not a global market. Otherwise, they would be laughed off stage when it's suggested that increasing domestic production of oil would affect gas prices in the US.

Gas stations raise or lower prices almost simultaneously precisely because they sell a fungible commodity. They are just keeping their notoriously low profits [bizstats.com] in line with their costs. If their gas costs too much, you won't buy their profitable sugar water and "food" they sell inside...